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When is one not enough?

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This is not an article about food or drink but in fact if you are a sole director of a limited company, this article is for you.

Many companies formed after 2006 adopted the Model Articles for ease. These are a standard set of articles which apply as your constitutional document if the company did not want a bespoke set specifically prepared for it.

Many such companies are also set up and run by a single director. However, a recent Court case casts doubt on whether or not the Model Articles actually allow this.

Articles of a Company set out governance matters, such as:

  • quorum for a directors meeting;
  • votes for decision making; and
  • other matters.

Model Article 11(2) says that the quorum for directors’ meetings may be fixed, from time to time, by a decision of the directors, but it must never be less than two, and unless otherwise fixed, it is two.

Model Article 7 says that any decision of the directors must be either a majority decision at a meeting, or a unanimous decision (taken in accordance with Model Article 8).

Model Article 7 then goes on to say that if:

  1. the company only has one director; and
  2. no provision of the articles requires it to have one than one director, then certain formalities which would otherwise apply to making director decisions do not apply.

When the 2006 Act and the Model Articles came into effect there had  at the time been questions raised about the interaction of Articles 7(2) and 11(2). The general consensus then (backed by guidance from the Department of Business Industry & Skills) was that Article 11(2) did not impose a requirement for a minimum number of directors.

It simply stated that the quorum for board meetings was two,with Model Article 7(2) confirming that when the company only had one director, the sole director could take decisions without regard to the director decision-making articles (including Model 11(2)). Therefore, a company with one director was always able to act and able to make all decisions.

The case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) suggests that as Model Article 11(2) requires a company to have a minimum of two directors for a quorate meeting then Model Article 7(2) cannot apply and a sole director does not have authority to act.

Therefore, if you are a sole director company with Model Article 11(2) or a similar provision setting a quorum at 2 you may need to consider:

  • appointing a second director (Model Article 11(3) restricts actions of a sole director if a quorum of 2 is required other than appointing further directors);
  • amending your articles; and
  • ratifying past actions.

Whilst this case may in the future be challenged and/or a call to amend the Model Articles this is however unlikely to be retrospective. Therefore, any matters where there is a sole director and Article 11(2) is in situ will be open to challenge calling into question the validity of all decisions made by a sole director.

If you want more information as to how this may effect you and your company please contact our Head of Corporate, Margaret Evans at Margaret.evans@fdrlaw.co.uk. You can also contact Margaret or our commercial team on 01925 230 000.

**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest and should be used for information purposes only. The information should not be relied on as an exhaustive explanation of the law or issues involved and specialist legal advice should always be sought in any particular case **